Interview: NiQ Lai and Ivan Tam of City Telecom

City Telecom is now the second
biggest operator in Hong Kong, offering speeds and prices that
no incumbent can dream of. It’s pushing fibre to
the home, but even the existing ethernet wiring delivers a
gigabit to customers

NiQ Lai, CFO of City Telecom: Why aren’t other
companies
following City Telecom? It took seven years to hit positive
free
cash flow. It’s a very, very long
cycle

Hong Kong’s City
Telecom is on track on its mission to commoditise bandwidth in
the Chinese region.

The company, which claims to be
the number two operator in Hong Kong, and the fastest growing
broadband provider, is now offering one gigabit connections
— that is symmetric, one gig each way — for
just HK$199 a month, equivalent to about US $25.

"Three years ago we were the
smallest operator in town. Today we’re the second
largest. We’re bigger than the next two combined,"
says NiQ Lai, the former Credit Suisse banker who is the chief
financial officer of City Telecom. "Last year we took 93% of
the market growth."

The company is second to the
incumbent, PCCW, "but we’re chasing them down",
says Lai. "They are double our size at the moment —
but they used to be five times our size. In 2006 we set a big
hairy audacious goal, to be the largest Hong Kong broadband
provider by 2016 — and four years into that game plan
we’re on track. Are there other examples where a
fixed-line new entrant has overtaken the incumbent?
We’re trying to do that."

The company "thinks
differently", he adds. "We are out to commoditise bandwidth
— and we’ve done that. Our whole way of
thinking is very different from that of an incumbent. We
embrace over-the-top content and love people to burn it up. We
want to make one gig to the home the industry norm in Hong
Kong."

Hong Kong, a densely packed city
of 7 million people on the southern coast of China, is about
the most competitive market for fixed and mobile communications
on earth: there are about 4 million landlines and 12 million
mobile phones in use. The city is a short drive away from
Shenzhen, the huge newly built high-technology city inside the
people’s republic where Huawei, ZTE and other
equipment makers have their homes.

An estimated 80% of the people
of Hong Kong — a special administrative region of
China, with its own laws on business and competition —
have broadband "and 34% of households have fibre to the home",
says Lai — Lai Ni Quiaque in Chinese. "Of that 34%, we
dominate. There are 800,000 fibre-to-the-home households and we
have 500,000 of them, so we are the market leader."

City Telecom’s
chief technology officer, Ivan Tam, points out that the company
has focused since it started on building and running its own
separate infrastructure. "That is our biggest asset," he
notes.

"When we started we decided not
to wholesale from the incumbent, because that is a dangerous
proposition. What we have done is meticulously laid our own
infrastructure within residential buildings — we laid
our own last mile."

Right from the earliest days the
company used technology that is normally regarded as designed
for office networks —category 5e cable.

The right cable

"Early on we recognized the importance of having the right
cable," says Tam. Cat 5e "allows us to support speeds of 100
meg up to one gig".

Today "cat 5e is our major
asset" — it has taken a lot of investment and time
— but two years ago City Telecom started its programme
to deploy fibre to the home. Now about one third of the homes
passed by the company’s network are capable of
being directly connected to fibre. "Our infrastructure makes a
lot of difference," says Tam.

The company uses two main
vendors in its infrastructure — Cisco for the cat
5e-based copper network, mainly Cisco switches, and
Alcatel-Lucent for the fibre network, which uses GPON
— gigabit passive optical network —
technology. City Telecom continues to look at other vendors, in
order to keep Alcatel-Lucent and Cisco on their toes, "but
we’ve been working with them for a while".

"The network is our major
asset," says Tam. "It takes a lot of time to deploy, building
by building and household by household. It’s the
access infrastructure that makes a lot of difference to us.
It’s the infrastructure that gives us the
advantage over the twisted copper pair that the telephone
network uses."

Phone networks have been able to
squeeze more and more out of DSL technology, which they use to
transmit broadband over wire originally laid to carry
low-bandwidth voice. "Telephone companies have to go through a
periodic upgrade," says Tam, in order to push DSL bandwidth
higher and higher. But City Telecom started out by laying
copper ethernet cable that can work at one gigabit, 100 times
the speed of many DSL networks in use today.

Equipment can be upgraded. But
equipment is placed in a limited number of installations and
engineers can get at it easily. Wiring goes everywhere and
upgrading that is more of a challenge. "At City Telecom we
don’t need to upgrade our wiring infrastructure,"
says Tam. "Passive infrastructure is a telco’s
biggest asset." The company will keep cat 5e throughout its
network until it is time to upgrade to fibre.

Early on the company took
another decision that allows it to offer an integrated service
at competitive rates: everything is delivered using IP
— voice, video and data. "That means we only need to
build one core IP network," he says.

High definition

In a world where 100 megabits is regarded as the minimum speed,
wide screen, high definition TV is one of the applications that
City Telecom promotes heavily. One streaming TV signal, either
of a cable-TV-like service or of internet TV, "easily consumes
tens of megabits a second from that alone", says Tam. "It is
quite possible to use more than 100 megabits if not one
gigabit."

But why, when the video signal
itself, takes 10 megabits or so, does a network need 10 or 100
times that? "Our content servers take advantage of the
high-speed core network," says Tam. "It means we are able to
stream video at 200 megabits and above — so the whole
movie is buffered before you watch much. That means you can
fast-forward at will." Or a customer can just download it to
their system and watch it at will.

Another reason why City Telecom
offers speeds up to one gigabit is to challenge the legacy
network in Hong Kong. At $25 a month the question customers ask
when comparing services is: "Why not one gig?", says Lai. "That
price is cheaper than DSL in Singapore. That’s why
we’re offering one gig for $25. It’s
like having Verizon’s FiOS at one seventh the
cost. It’s in the mindset —
we’ve built it from day one."

Tam smiles: "The
incumbent’s mindset is to sweat the assets."
Conventional operators the world over are trying their hardest
to push DSL speeds, using new technology and reducing line
lengths, as fast as possible, avoiding wherever possible the
thought of replacing that old copper that runs into every
customer’s home.

Is it financially successful
after such a short period of fast growth? "We have 30% ebitda,
with positive free cash flow after capex," says Lai.
"We’re net debt free. We are profitable"

According to the
company’s figures for its year ending August 2010,
turnover was up 6.5% to just over US $202 million, with ebitda
$60 million. The profit attributable to shareholders was $27
million.

The Nasdaq-listed company had
1.11 million customers at the end of the financial year, out of
1.77 million homes passed — a penetration rate that
companies in many parts of the world can only dream of. The
number of customers went up by more than 17% during the year,
while network coverage in terms of homes passed went up
8.5%.

Virtuous cycle

"We’re in a virtuous cycle now," says Lai. People
on slow networks on Hong Kong can’t communicate at
full speed with those on City Telecom. "We are running a very
aggressive member-get-member campaign."

And he is confident that the
company will overtake PCCW my 2016. "Our message is consistent,
still 2016," he adds.

As 2011 starts the company has
turned a corner in its performance, he believes. Because of the
amount of network it has already built, "the capex halves" and
that leaves the team to focus on ramping up subscriber numbers
over the next five years.

Meanwhile the argument is
getting more and more in favour of high speeds, he adds. While
wide-screen high-definition TVs are coming down in price,
internet-enabled TVs are becoming more common, and 3D sets are
appearing. Netflix, the rent-a-DVD service in the US, is
switching to streaming (and since our interview Amazon is
stepping up its move into movie rental and streaming).

And the Apple TV is
Netflix-enabled, notes Lai. "All this is content for fat dumb
pipes."

Now the term "fat dumb pipe" is
something that most top executives of telecoms operators would
wince at. The last thing they want to be is the operator of a
fat dumb pipe. They see their future as integrated media and
content companies — and the Hollywood parties are
reputedly better than those at Broadband World Forum.

"We’re good at
doing dumb pipes and we do it intelligently," adds Lai. "Ivan
[Tam] is good at doing the pipes and filling them."

Fat dumb pipe

Tam responds: "If its economic to be a fat dumb pipe then
people don’t mind." Customers see the benefit,
even in ordinary YouTube downloads, he adds. The global average
speed for a YouTube stream is 3.8 megabits a second; watch it
on City Telecom in Hong Kong, and the speed is 27 megabits.
"That gives you a phenomenal YouTube experience. You
don’t need one gigabit all the time but if you can
burst to more than 100 megs periodically for the end user
it’s a massive experience. And we charge market
rates for it."

The average
family’s use of broadband has increased hugely
over the past few years, notes Lai. "A few years ago a family
would share one desktop PC. Now there are several laptops, and
a Wii, and smartphones, and HD TV sets."

And iPads, of course. If your
tablet is connected to standard DSL "you’re not
getting full use out of your iPad", he says. City Telecom is
starting to bundle the Samsung Galaxy tablet, with wifi not 3G,
that connects directly to the approved router in
customers’ homes — and to the 1,000
hotspots around Hong Kong. "But the key is the home
experience," says Lai. "Stay and enjoy our movies.

Tam notes that for all this,
reliability is key, and "we have paid a lot of attention to the
reliability of the network", he says. Equipment, software and
outside plant all have to be suitable for triple-play
services.

Lai adds: "Hong Kong is rated
second in the world in terms of quality of service."
It’s exceeded by South Korea where there was "lots
of government intervention". But City Telecom is entirely
funded through private means. "We own 52%, the primary
founders. I sold my home to buy equity."

Over the past decade the company
has spent $400 million. "It took us seven years to hit positive
free cash flow."

So why aren’t
others following City Telecom’s example? Are many
willing to invest for seven years without a return, he wonders.
"It’s a very, very long cycle."
GTB

Comments

I just wish someone would explain all this to county councilors in the UK, who are handing public money over to the incumbent to patch up the obsolete victorian phone network... we are going to be stuck on copper here for another decade or maybe more. good luck Lam. you have our admiration. (and envy) A man of grit.